Thursday, November 4, 2010

Not Bad, But Where Is the Explicit Nominal Target?

There has been plenty said about the FOMC decision to go ahead with QE2. Let me add that this plan could have packed a lot more punch if the Fed had committed to an an explicit nominal target. Instead we get several loosey-goosey references in the FOMC press release about Fed needing to keep inflation at a level consistent with its mandate. To be fair, Ben Bernanke does mention in his Op-Ed today that most members of the FOMC believe 2% is the inflation rate consistent with a healthy economy. Still, there would be a lot more certainty and wallop to the Fed's action if it would just come out and say "The FOMC is now committed to a X% nominal target and will do whatever is necessary to maintain it." Doing so would go a long way in shoring up and stabilizing inflation expectations. For some reason, though, the FOMC is afraid to make such an explicit commitment. Maybe it will still do so in the future. And maybe, just maybe it will really be bold and commit to a NGDP level target.

DB, I think we can imagine what would happen if the Fed were to suddenly change targets from inflation to GDP. There would be a firestorm of criticism and articles lambasting the chicanery of the Fed, asking what are they trying to hide by shifting from an inflation target.

The Fed's credibility is already low, they daren't risk reducing it further.

Your arguments for targeting NGDP are very cogent. However, I don't think I've seen you address is the stoking of asset bubbles. Could you please elaborate on this, and on how you think emerging markets should react to the surge of capital flows they are receiving?

Gregory (Scotland Yard detective): "Is there any other point to which you would wish to draw my attention?"Holmes: "To the curious incident of the dog in the night-time."Gregory: "The dog did nothing in the night-time."Holmes: "That was the curious incident."